Yes - they totally do that. If there is only space for a large instance, but you want a small one, they fit your small one in the free capacity, and there is now space for someone else to fit another small one next to it.

For business reasons they might decide not to do that though - your small instance might mean they have to say no to a big allocation later.

Instead they just delay your instance starting and hope other instances moving around opens up a more suitable location for it.

Theres an entire paper on the topic: https://dl.acm.org/doi/10.1145/2797211